Tuesday, May 13, 2008

Last weekend, I was asked to answer a few questions after a local screening the film "King Corn", an offbeat documentary by a couple young college grads who decided to move to Iowa and try growing the crop that fuels us all. The audience questions centered around the usual public fears about food. Is all corn GMO? What animals can eat corn? What else are they fed? Where can I learn more? And, my favourite, is the "glucose-frutcose" listed on my bottle of Arizona Iced Tea made from corn?

I'm not an expert on all those subjects - and I admitted as much at the screening. I can say that the answer to that last one - yes - got me thinking more about the uses of our crops and the causes of the world food crisis.

Frankly, any ingredient that you do not recognize on the label of a processed food or beverage is probably made from corn. Xathan gum? A fermented sugar made from corn. Lecithin? Made from corn. Vanilla extract? Vanilla and corn syrup. Malt extract? Often made from corn, not barley. Dextrin? As Michael Pollan would say, corn, corn, corn.

Corn is so ubiquitous in our food today, that it is natural to assume that food is the reason we grow so much corn. But all those food additives and sugars made from corn, including the bane of nutritionists and foodies, high-fructose corn syrup (I highly recommend the scene in King Corn where the protagonists try to make some in their kitchen), still only make up a small fraction of the corn crop. The US don't produce corn to make high-fructose corn syrup, it produces high-fructose corn syrup because it has developed an agricultural system that profits on producing large volumes of corn anyway. The majority of that corn, until very recently, was bring to animals, largely beef cattle.

The graph to the left shows the end use of US corn over the past six years (all data that follows is from the Foreign Agriculture Service and the Economic Research Service of the USDA). The big pink block in the middle is domestic feed use (~60%, down to 47% last year). The top category is exports, most of which is also used as feed (19%). The dreaded high-fructose corn syrup has been around 7% (5% last year) of the corn crop, glucose / dextrose around 2-3%, beverage alcohol (yep, there's corn in that Bud Light) around 1-2%. Cereals and other foods? 2%.

The one area of growth (in blue) is fuel alcohol, or ethanol. Last year, 24% of all US corn production (29% of non-export corn) was used for ethanol. The percent breakdown of corn use changed the last few years as a result of the ethanol surge. But the other uses of corn, in terms of raw numbers did not. Exports and feed use were relatively flat (an assumption made in our paper on the subject). The US simply grew more corn to produce ethanol. As many have been arguing, that is why US production of corn-based ethanol has not played a role in the global food crisis. No harm, no foul, right?

Tempting, but there are two holes in that argument.

First, the extra corn for ethanol has to be planted on productive croplands, lands with the right soils, and most of that land is being used. In 2007, soybean planting - the other major feed crop grown in the midwest US - went down 16% in the US to make space for more corn. Soybean exports and use remained the same, but the ending stocks were down 72%. In other words, we've been cleaning out the cupboards.

Soy planting is back up to 2006 levels this year, as prices rose and farmer rotate those fields full of corn back to soy, as is common practice. If the US to keep up ethanol production, soy planting will probably drop again the following year, or corn exports will go down. In other words, if corn ethanol production is to continue or increase, the US is most likely going to have to i) export less corn, ii) export less soybean, or iii) produce less domestic feed.

Complicated business - and potentially very profitable business. If you are a speculative investor with a fast computer, there's a lot of money to be made betting on crop production. The world relies on a very small number of staple crops for food and feed: corn, soybeans, wheat, rice, and other regional crops like cassava. The planted area, production and price of one can affects the others. The ethanol surge in the US paved the way for more speculative investment in commodities, which has helped drive up prices.

Second, the US is the world's largest producer of corn and soybeans. The demand for both has been rising for years because of rising meat consumption in Asia.. The US produced 43% of world’s corn in 2007/2008 (right). The US is also responsible for two-thirds of all the global corn exports. If you need to buy some corn, there are few other places to shop. Last year, the amount of corn used for ethanol in the US in 2007/2008 is greater than the domestic corn production of every other country in the world, save China. That's taking a lot of potential grain off the market. Now, yes, exports remained steady last year. But to meet the growing demand - feed consumption in China alone is rising a few percent a year - exports should be growing. The signs point to, at best, exports remaining constant, or at worst, exports decreasing.

There are a lot of causes of the current food price crisis - I recommend the FAO's website for information. Many have called it a perfect storm of oil prices, ethanol production, rising meat consumption, drought, price speculation, rising population. The corn-based ethanol surge in the US is not the sole cause, by any means, but it has played a role.

The global food system may have been a dam that was ready to break. The growing population and growing demand for animal feed had filled the reservoir up to capacity. The US ethanol policy helped crack some holes in the concrete.